changing the permalink structure will allow you to easily link to your blog. if you implement the plugin that ryan wrote in the post, or try to follow mxtrader’s method, one problem you’ll run into is trying to link back to your blog. But if your blog is located in a subfolder, hence the different permalink structure, you’ll be able to link to your blog with no problem.

so I should abandon mxtraders method, go with Ryan’s plugin, place the blog in a subfolder, and use Dougal’s permalink structure?

I still don’t see how that gets me an index page at mydomain.com/ – I realise I’m being very slow here but I’m just missing something fundamental, obviously.

I install the blog at mydomain.com/blog
I install Ryan’s plugin
I edit the Permalink structure
I create a Home Page using the Create Page function (isn’t this placed at mydomain.com/blog/home/? – hence my confusion)

What I did was:
1. Installed the blog at mydomain.com
2. Created the Home page and noted the ID of the page
3. Installed Ryan’s plugin (editing with the correct Page ID)
4. Edited the Permalink structure

Hey presto, I have a site at mydomain.com and a blog at mydomain.com/blog

There is an easier and imho, better, solution — though it’s different from what you specify — if your domain host is accommodating: I’ve got a main page at http://www.crispen.org/ and a blog at http://blog.crispen.org/. Just ask your domain host for a sub-domain (aka virtual host) and point blog.yourdomain.com to http://www.yourdomain.com/blog/. My domain host performs this service for free (and has a script to automate it), but when I was shopping for domain hosts, I ran into some that wanted a full monthly fee for each virtual host.

As I said, it doesn’t solve your particular set of requirements, but some folks might find it useful.